Pay-to-save: negative rates rewrite rules of business

ECB - Frankfurt

Negative interest rates have moved from the hypothetical daydream of academic economists to a real world scenario. Sub-zero rates are now in place for countries accounting for almost a quarter of global gross domestic product (GDP), and although the Federal Reserve sanctioned a small hike in the US last December the once-expected rate rise appears to be on the rocks. It’s time for businesses to explore the possible impact of a prolonged period of negative rates, especially if they make the leap from central to commercial banks.

It’s a situation that could turn a lot of business norms on their head. Any strategy to store assets as something other than cash could have merit, meaning a scenario where companies scramble to pay their invoices early could be on the cards! For commodity-intensive corporates, the next step would be to arrange a line of credit instead of cash to act as a ‘rainy day fund’, which would then free them up to increase inventory in lieu of costly cash.

Key to all this would be using predictive analytics to answer multiple ‘what-if?” questions, as well as having the right risk and credit tools. For example, it would be important to be able to see potential future exposure across your counterparties. What if they failed to deliver? Stockpiling in storage facilities permits greater flexibility of supply when production is disrupted or where there is an increase in consumption. It even gives the party storing the goods an opportunity to take a strategic position when the market price moves in the future.

Risk issues

However, of course storing commodities also gives rise to a number of risk issues depending on the physical characteristics of the commodity and the legal and regulatory environment of the storage location. Moreover, some of the most important decisions influencing the choice of a warehouse or storage tank facility are broader still: who are the operators? What is their professional reputation? Have they the technical skill and capacity to handle these goods? What is their credit profile?

It is estimated that a sizeable majority of companies with large commodity exposures do not have an integrated system to manage commodity procurement along with treasury and risk. Rather than tailor-made commodity procurement risk management (CPRM) systems, these businesses have home-grown solutions, multiple – in some cases thousands of – spreadsheets, or an outdated legacy database.

None of these approaches in isolation would be able to cope with the demands of inventory-loading in a negative rates environment. While this may be a fictional future at the moment, it would be a brave economist who would dare to say never, and companies would do well to tool up in preparation.


Related reading

Mark Carney Bank of England